Managerial Economics

As a VP of sales for a rapidly growing company, you are grappling with the question of expanding the size of your direct sales force (from its current level of 60 national salespeople). You are considering hiring from 5 to 10 additional personnel. How would you estimate the additional dollar cost of each additional sales person? Based on your company's past sales experience, how would you estimate the expected net revenue generated by an additional sales person?

How would you use these cost an revenue estimates to determine whether a sales force increase (or possibly a decrease) is warranted?

I am thinking Sensitivity Analysis should be applied to this concept. Do you agree? But without any figures it would be hard to use the below equation, correct?

Break-Even Point in Sales = Total Fixed Costs / Contribution Margin Ratio

Thanks,

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  1. I don't understand why total fixed costs should ever be a major component to a calculation that should be made on the margin. The question is simple, does the expected additional revenues (MR) from the added sales force exceed the expected labor costs (MC) from the added force? If yes, then hire, if no then dont.

    Now then, estimating expected net revenue is not nearly as simple.

    If I had this problem.....

    I would start by forming a formal economic model. I would start by listing all the variables that affect sales revenue. One obvious variable is the size of the sales force. Other variable include advertising expenses, product reviews, general economic activity, size of competing firms, some notion of size of the total market, etc.

    Next, I would want to quantify each of these important variables as best I could. (e.g., GNP could be used as a measure of economic activity.)

    Next, I would look for relationships amoung variables. I would plot sales against each of the variables to see if expected patterns emerge. I would especially look for non-linear relationships.

    Next I will want to empirically measure the "model" using an econometric technique(s). Sales is the dependent variable, the empirical measures of your explanatory variables are your right-hand-side variables. The result, if successful, is an estimated model which relates each of the variables to sales. By changing one of the variables, I could estimate how much sales will change.

    Once here, I am nearly done. Take it from here....

    I hope this helps.

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  2. Thanks Economyst! Great start for me and I took it and ran with it.

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